BOJ's policy pivot opens scope for faster rate hikes

The Bank of Japan (BOJ) has decided to accelerate its pace of interest rate hikes, anticipating risks of an inflation overshoot, according to sources. This policy pivot comes in light of upcoming data, such as the Tankan survey in Thursday and the inflation data in Friday, which could signal the need for another hike either in October or December.

Some market players even speculate about a possible hike in October, as the yen weakens, putting pressure on household costs. Despite inflation risks, there is no evidence yet of a sharp spike in price growth, according to BOJ Governor Kazuo Ueda. However, he has stated that a back-to-back rate increase would only occur if there is a risk of sharp price rises or if underlying inflation is already above the 2% target.

The BOJ's readiness to act pre-emptively indicates a shift away from prolonged deliberations in between meetings. Financial conditions remain accommodative, necessitating a steady increase in rates. Former BOJ board member Makoto Sakurai expects the central bank to raise its policy rate from 1.25% to 2% by around June next year.

Inflation expectations are a crucial factor, as shown by the record-high corporate inflation expectations, with Tokyo's core consumer inflation likely hitting 2.4% in September. The upcoming BOJ quarterly forecasts will provide insights into the central bank's rate-hike timing and how aggressively it will push inflation up to its 2% target.